ECON1101 Lecture Notes - Lecture 34: Australian Wine, Comparative Advantage, Human Capital
ECON1101 Week 12 Lecture A
● Relative Wages
○ Given equil relative wages, 3 possible cases:
■ Case X: If w/wf = 1.6 (no LCP for textiles) thus AUS produces both goods
and is LCP of beef and FOR produces only textiles
■ Case Y: If w/wf = 2 (no LCP for beef) thus AUS produces only beef and
FOR produces both goods and is LCP of textiles
■ Case Z: If 1.6 < w/wf < 2, Both countries specialise where AUS (LCP of
beef) produces only beef and FOR( LCP of textiles) produces only textiles
■ In each case: AUS produces and exports beef to import textiles. FOR
produces and exports textiles to import beef
● Reasons for comparative advantage:
○ Climate
■ Impact on agricultural production, tourism services
○ Natural Resources
■ Oil from OPEC countries
■ Gold mining in Australia, not Japan (since readily accessible for Australia)
○ Technology/Know How/Human Capital:
■ Ex. growth of Australian wine production and exports, Australia as major
manufacturer of high-speed ferries
○ Capital-Labour ratios:
■ Capital abundant US and Europe produce Boeing and Airbus planes
(capital intensive production)
■ Labour abundant China produce toys and clothing (labour intensive
production)
○ Dynamic comparative advantage:
■ Comparative advantage changes over time due to investment in physical
and human capital and in technology
■ E.g. After WW2 Japan produced toys but over time began to produce
cameras due to additional wealth overtime.
● Economic Arguments for International Trade:
○ Voluntary exchange is mutually advantageous
○ Comparative advantage and specialisation (will specialise in a good they have a
comparative advantage in)
○ Exploit economies of scale
■ Adam Smith’s division of labour
○ Benefits of increased competition
● Intra-industry Trade:
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Given equil relative wages, 3 possible cases: Case x: if w/wf = 1. 6 (no lcp for textiles) thus aus produces both goods and is lcp of beef and for produces only textiles. Case y: if w/wf = 2 (no lcp for beef) thus aus produces only beef and. For produces both goods and is lcp of textiles. Case z: if 1. 6 < w/wf < 2, both countries specialise where aus (lcp of beef) produces only beef and for( lcp of textiles) produces only textiles. In each case: aus produces and exports beef to import textiles. For produces and exports textiles to import beef. Gold mining in australia, not japan (since readily accessible for australia) Ex. growth of australian wine production and exports, australia as major manufacturer of high-speed ferries. Capital abundant us and europe produce boeing and airbus planes (capital intensive production) Labour abundant china produce toys and clothing (labour intensive production)
